Tax on Cadillac Plans: Necessary Cost-control or Unfair Burden?

President Obama is meeting with a group of labor union leaders Monday afternoon to discuss the “Cadillac” health insurance tax — the tax on high-cost insurance plans that’s one of the major sticking points remaining in finding a compromise health care reform bill that can pass both houses of Congress.

The Senate leaders who drafted the tax say it helps solve two of the major problems of reform: How to pay for expanding coverage to millions of uninsured Americans, and how to slow the skyrocketing growth of U.S. health care spending.

Opponents, meanwhile — including many Democrats in the House — say the tax will unfairly target middle-income Americans’ hard-earned health benefits.

Below, some answers to questions about the “Cadillac” tax:

Who would pay it?

The new tax is an excise tax — a tax levied on the seller of a good or service — so officially, insurers would be on the hook for it. However, the cost of an excise tax is usually included in the price of the product, so it’s the buyers of health insurance — companies and individuals — who in the end would likely pay the new tax.

Which plans would be affected?

As written in the Senate bill, when the tax began in 2013 it would hit all individual plans that cost more than $8,500, and family plans that cost more than $23,000. That cost includes not only basic monthly premiums, but also Flexible Spending Account reimbursements, employer contributions to a Health Savings Account, and contributions to dental and vision coverage.

If all those things add up to more than the cost threshold, any excess costs would be taxed at 40 percent. So, for example, a family plan that cost $25,000 would incur a tax of $800 (40 percent of the extra $2000).

There would be a few exceptions and modifications. The average cost of health insurance varies by state, so for the first three years of the tax, the cost threshold in the 17 states with the highest health care costs would be higher than in the rest of the country. There would also be higher thresholds for people in some high-risk professions, like law enforcement and mining, and for retired people older than 55 who are not eligible for Medicare.

Over time, the threshold would increase — it would rise by the Consumer Price Index plus one percent each year. The Congressional Budget Office and Congress’ Joint Committee on Taxation estimate that the tax would hit three percent of premium costs in 2013. However, because health care costs are rising much faster than the Consumer Price Index, the tax would gradually hit more and more plans. Whether or not that’s a good thing is a matterfor debate.

What are the arguments for and against the tax?

The Senate, and the White House, have endorsed the “Cadillac” tax. Proponents, including many health care economists, argue that it would both raise revenue and lower health care spending, by encouraging employers to cut back on unnecessarily lavish health care plans.

“It would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending,” MIT economist Jonathan Gruber, one of the leading proponents of the plan, wrote in a December Washington Post editorial.

It would raise revenue directly by taxing expensive plans. But, proponents argue, it would also raise revenue because employers that turn to cheaper plans in order to avoid paying the tax could pass on those savings as wage increases — and those extra wages, unlike most health benefits, would also be taxed. At the same time, the turn to less expensive plans would also encourage more efficient, cost-effective health care.

Opponents, on the other hand — including many House Democrats, and union leaders whose members have given up wage increases to keep their generous health benefits — say the tax will unfairly hit working-class people whose health insurance is expensive not because it’s so generous, but because they are older or live in an expensive part of the country.

And some analysts back them up. In one recent article in the journal Health Affairs, analysts found that the type of insurance (HMO, PPO, etc) and benefits included in a plan explained only 6.1 percent of the variation in plans’ costs — the rest came from other factors, like geographic location, type of industry and age of employees.

“Coverage could be expensive because the people covered are unusually sick (on average) — because the vehicle is not a Cadillac with “luxury” or “unnecessary” features, but an ambulance,” health law analyst Timothy Jost wrote in a Health Affairs blog.

On the NewsHour tonight, more from MIT’s Jonathan Gruber and Josh Bivens, of the Economic Policy Institute. They’ll debate the pros and cons of the proposed tax.

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